A growing chorus of state financial officers is calling for a dramatic shift in investment strategy, urging public pension fund managers to sever ties with China-based companies. This call to action, spearheaded by 18 state treasurers and financial officers from across 15 states, highlights mounting concerns about the Chinese Communist Party’s (CCP) influence on businesses and the potential risks associated with investing in a nation increasingly intertwined with political and military agendas.
In a letter sent to fiduciaries managing public pension funds, the officers paint a stark picture of the challenges facing investors in China. They point to a crackdown by the CCP on due diligence firms, compromising the reliability of financial audits and casting a shadow of doubt on the transparency of Chinese businesses.
The letter also raises alarm bells over the CCP’s manipulation of stock and bond markets, where efforts to conceal foreign investment outflows have been observed, further fueling concerns about the reliability of market data.
The officers warn that the CCP exerts extensive control over Chinese companies, including the placement of military and intelligence personnel within them. This direct involvement casts a pall over the independence and objectivity of these companies, raising questions about their long-term stability and potential for transparency.
Adding to the growing list of concerns is the opaque nature of Variable Interest Entities (VIEs), offshore shell companies that represent the most common investment avenue for U.S. investors in China. The SEC has issued warnings that the CCP could declare VIEs illegal at any moment, creating significant financial risks for those who have invested in them.
Geopolitical tensions, including China’s potential invasion of Taiwan, further exacerbate investor anxieties. The potential for escalating conflict in the region creates an unpredictable environment for international businesses and investors, potentially impacting the value of their investments.
Furthermore, the financial officers highlight a noticeable decline in foreign investment in China, leading to substantial outflows from its markets. This trend, mirroring similar concerns raised by state fiduciaries in Florida, Indiana, and Missouri, suggests that the broader investment community is increasingly wary of the risks associated with Chinese investments.
The letter’s authors draw parallels with Russia’s invasion of Ukraine, where many fiduciaries failed to recognize warning signs and ultimately experienced significant financial losses. They argue that state pension boards have a duty to learn from past mistakes and avoid repeating them.
This call for divestment echoes concerns raised by the bipartisan House Select Committee on the Strategic Competition between the U.S. and the CCP. Earlier this year, the committee released a report detailing how asset managers and index providers invested over $6.5 billion in 63 Chinese companies that have been blacklisted or red-flagged by the U.S. government.
The letter from the state financial officers represents a significant escalation in the debate over investment in China. It highlights the growing unease among U.S. investors and policymakers about the CCP’s influence on businesses and the potential risks associated with investing in Chinese markets. As these concerns continue to mount, the pressure on public pension fund managers to reconsider their China-based investments is likely to intensify.
